Honda Australia braces for profit slide

HONDA Australia is battening down the hatches, trimming its model line-up and cutting costs as it prepares to slide from last year’s record $82 million profit towards a trading loss next year.

Speaking at the release of the Honda City in Sydney last week, Honda Australia senior director Lindsay Smalley said that while Honda would make “a small profit” in the fiscal year ending March 31, 2009, this result was “really bolstered by the first-half trading and the strong exchange rate in the first half”.

Mr Smalley said the company expected to suffer “a trading loss” in the following financial year, beginning April 1.

“That will be for the first time since 2002, when we went through a similar exchange rate shock,” said Mr Smalley, referring to the $7.5 million loss posted for the year ending March 31, 2002.

This time, the Australian dollar has dropped 40 per cent to the Japanese yen and 30 per cent to the Thai baht, meaning that in a market already darkened by the cloud of economic downturn, manufacturers such as Honda will have to put prices up.

Left: Honda City and S2000.

“Virtually all of our cars will go up in price, again and again,” Mr Smalley said, adding that it was an industry-wide problem and one where manufacturers simply would not turn a profit unless they increased prices.

With prices going up and demand deteriorating overall, Honda Australia has revised its expected sales numbers in line with the Federal Chamber of Automotive Industries (FCAI) total market prediction of 880,000 units, which would still give Honda a 5.5 per cent share.

This equates to about 48,400 units in 2009, bringing Honda’s sales down to 2005 levels (47,001) and well below its 2007 sales peak of 60,529.

Mr Smalley said the downward sales spiral required a rework for dealers to ensure they survived the downturn.

“Our dealer network is structured to sell between 60,000 to 80,000 cars a year, in the current state, and we want to maintain that dealer network to the best of our ability,” he said.

Mr Smalley said supporting the dealer network by measures such as improving the back end of the dealer business and keeping stock inventory down would see them through.

“There will be a priority towards lifting efficiency in the dealerships, a priority towards improving throughput in service departments, in better servicing and capturing the 385,000 Hondas that are currently on the road under 10 years old, so our dealers need to get these folk back in, service more cars and cover their fixed expenses through back-end type profitability to see through what could be a prolonged downturn in the car industry.” Honda’s decisive approach to reducing stock levels meant it had to contain a glut of cars in the third quarter last year, but claims that now has been corrected.

“We took very early action, and destocked our dealer network from September last year. Normally they like to keep 60 days stock, we reduced their stock to 30 days during that period we ended up holding an extra 30 days stock.

“Obviously we transferred the inventory to us, and we’re working on that inventory at the moment. It’s not a major issue for us.” While Mr Smalley said Honda Australia would not shed staff due to the downturn, he added: “I’m not saying we won’t restructure for the times, but there’s certainly no plan to reduce staff.” Honda may not be retrenching staff but it is shedding models from its line-up - both current models and those planned for future introduction.

Of the existing Honda Australia line-up, the CR-V Luxury manual has already been removed from the price lists, the S2000 will go when current stock is depleted and Honda is examining closely the performance of the rest of the range to weed out slow sellers.

Some future model plans have also been halted. While the Civic Si hatch and Odyssey are both expected in April, the CR-V diesel “has been put on the back burner”, says Mr Smalley, while the CR-V two-wheel drive will only happen “if we could achieve a significant cost down on that car and still sell it at a reasonable volume”.

Some of Honda’s predicament can be attributed to its customer base. “Our business is exposed particularly heavily to the private market, around 85 per cent of our sales is to the private buyer … also, if you look at the profile of the age profile of the Honda buyer it is in the 50s where the majority of our sales are happening, and the majority of those buyers are shocked by the loss of wealth in the last six months, so we’ve been hit quite heavily there.” Honda hopes that by targeting the younger buyer with cars such as the City and also focussing on business and user-chooser markets, that it will have enough momentum to achieve sales targets.

The sharp decline in Honda Australia’s recent performance is mirrored by Honda’s global results. Honda slashed its profit forecast for the fiscal year tho March by 57 per cent, to Y80 billion ($A1.4 billion) from an earlier Y185 billion ($A3.23 billion), down 87 per cent down from the earnings the previous year.

More telling of the sharp point at which this dramatic reversal of fortunes occurred, Honda has forecast a Y190 billion ($A3.1b) operating loss globally for the fiscal second half ending in March.

Fumihiko Ike, Honda’s CEO for regional operations (Asia and Oceania) and President and CEO of Asian Honda Motor Company, attending the Honda City launch in Sydney last week, saying swift action by Honda was required.

“The issue is, we don’t know how long it will last,” he said. “So we take immediate action, like stopping major investment, or stop some development, to cover our financial performance.” One way to ensure its financial performance was to cut back on any development that does not have strong commercial prospects, Mr Ike said.

“We suspend commercialisation of the clean diesel engine, because the total volume is still not enough to justify that technology. So the current market situation is not the right time to commercialise diesel technologies. Although it is a very good technology, we have to make money out of it.

“So we concentrate on hybrid technology as it is easier for efficiencies and has high potential to spread the volume.” Mr Ike said that it is vital that Honda acts quickly on developing further hybrid technologies, as the company needed to “accelerate that kind of development in order for us to stay in this industry”.

There are also plans to rationalise model lines in the current environment. “Most of the car we making a profit on globally – and there are not so many, basically a very limited number of platforms like the Civic, CR-V, Jazz and maybe City,” he said.

“From now on the core Civic, CR-V, Jazz/Fit and new Insight are going to be the global, mass-produced cars. The other models, on the Japanese domestic market, there are too many models, considering the shrinkage of the market, so we have to reduce the models.” When asked if Honda would continue to build two Accord models, Mr Ike said: “Eventually, I don’t think so,” but he wouldn’t be drawn on which model Honda would be discontinued.